US Contractor Accused of Fraud Still Winning Big Afghan Projects

Sunday 19 September 2010

by: Marisa Taylor and Warren P. Strobel | McClatchy Newspapers | Report

Washington - On July 31, 2006, an employee of the Louis Berger Group, a contractor handling some of the most important U.S. rebuilding projects in Afghanistan, handed federal investigators explosive evidence that the company was intentionally and systematically overbilling American taxpayers.

Neither the whistleblower's computer disk full of incriminating documents nor a trail of allegations of waste, fraud and shoddy construction, however, prevented Louis Berger from continuing to reap hundreds of millions of dollars in federal contracts.

In fact, two months after the government learned of the employee's allegations, the U.S. Agency for International Development tapped Louis Berger to oversee another $1.4 billion in reconstruction contracts in Afghanistan.

The decision to brush aside the allegations and the evidence and keep doing business with Louis Berger, underscores a persistent dilemma for the Obama administration in Afghanistan and elsewhere.

Cutting ties with suspect war-zone contractors in Afghanistan would threaten the administration's effort to rebuild the country and begin withdrawing some of the nearly 100,000 U.S. troops there next July. However, as the recession, unemployment and budget deficits prompt belt-tightening at home, the billions the administration is spending to try to rebuild Afghanistan and Iraq are receiving increasing scrutiny from Congress and the public.

Sen. Tom Coburn, R-Okla., a longtime critic of the U.S.'s handling of war zone contracting, said the Obama administration should do more to crack down on waste and fraud in Afghanistan.

"Fraudulent defense contractors need to be held accountable because they undermine our nation's interests both abroad and at home," he said.

Louis Berger's alleged overbilling, a practice which dates at to least the mid-1990s, swelled to tens of millions in lost tax dollars, according to a person familiar with the probe who spoke to McClatchy on the condition of anonymity because the allegations are the subject of a sealed court case.

Court documents, however, reveal that the Justice Department is negotiating a deal that would "aid in preserving the company's continuing eligibility to participate" in federal contracting in Afghanistan and elsewhere.

Founded in 1953, Louis Berger Group does engineering and construction-related work domestically and in about 80 countries worldwide, according to the company's website. It has more than 5,000 employees and is headquartered in Morristown, N.J.

Holly Fisher, a Louis Berger spokeswoman, said the investigation into the company's pricing shouldn't taint its work for the government.

"While its work in Afghanistan was covered by that methodology, it is the methodology that is in question, not the work in Afghanistan," she said.

Fisher declined to answer additional questions about the investigation or to make any corporate officers available for interviews.

USAID officials acknowledged last year in an internal report that they'd lost confidence in Louis Berger to oversee projects under the latest, $1.4 billion Afghanistan contract, which is jointly held with another U.S. company, Black & Veatch of Overland Park, Kan.

USAID, however, didn't respond for three weeks to repeated requests for interviews about why it continued to award contracts to Louis Berger or about the ongoing criminal investigation or on contracting in Iraq and Afghanistan.

Instead, the agency issued a statement pointing to its internal report about the joint venture, although it didn't provide a copy of the report, which McClatchy obtained independently.

"The assessment found vulnerabilities, and we immediately worked to address the identified issues," USAID said.

The agency said it began to hold weekly meetings with company officials, assigned monitors to every site and changed personnel involved in the contract.

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"USAID continues to take necessary actions to protect U.S. taxpayer funds in this matter," the statement said. "We are engaged in ongoing dialogue with the Louis Berger Group, Inc. to ensure that the corporation is in full compliance with our contracts."

However, Ashley Jackson, the head of policy in Afghanistan for the international aid organization Oxfam, said little has changed despite the Obama administration's pledge to revamp the agency.

USAID hasn't been an aggressive watchdog in Afghanistan, partly because it's under political pressure to pump billions into the country without regard to the quality of the work, Jackson said. It also lacks the resources and expertise to monitor the projects, she said.

"A system has emerged where USAID is basically like a pass-through for these contractors," said Jackson, whose agency wrote to Obama last year about the problems with USAID and contractors.

From the outset, USAID allocated nearly half its funds in Afghanistan to five large U.S. contractors, she said. In turn, the contractors created layers of subcontracts that are impossible for the agency to track.

Without strict oversight, construction costs balloon. In one example, a stretch of road between the international airport and Kabul cost at least four times the average for road construction in Afghanistan, Jackson said.

"It's not just Louis Berger," Jackson said. "You routinely see these projects come in four or five times what it should cost."

However, Michel Jichlinski, Louis Berger's former president and operating chief, said he thinks the company's construction costs in Afghanistan were appropriate considering the tight deadlines it had to meet in dangerous conditions.

When the company began construction on the Kabul-Kandahar highway between the country's two largest cities, the road "disappeared into the rocks and sands that were heavily mined" said Jichlinski, who retired in 2008. "Eight months later, people were driving over a striped blacktop, saving days of travel."

While USAID noted in its internal report that security is a legitimate reason for some of the delays in the companies' projects, the agency said it didn't understand "the rational for many of the joint venture's security approaches (e.g., one security person for each worker at one road project)."

The whistleblower case, known as a qui tam lawsuit, is sealed in federal court because of the ongoing criminal investigation.

Federal and state prosecutors wouldn't comment on the lawsuit or the investigation.

McClatchy was able to piece together more details about the case by reviewing government documents and speaking to officials who insisted on anonymity because the case is under seal.

That review found that Louis Berger is accused of manipulating overhead cost data and overhead rate proposals submitted to the U.S. government and several states including Massachusetts, Nevada and Virginia.

The overbilling involved "complicated math," said one of the officials, and in some instances the company is accused of shifting overhead costs from private clients to federal and state contracts, where they were less likely to be noticed.

While in previous instances, U.S. criminal investigators haven't always pursued contract fraud aggressively, "this is not one of those cases," the official familiar with the case said.

He pointed to an August 2007 raid on Louis Berger's home office in New Jersey, the convening of a federal grand jury and the targeting of two senior officials, one of whom who has since left the company.

In addition to its overseas work, Louis Berger Group constructed roads and other transportation projects domestically, including roadwork in Nevada; and, through VMS Inc., a former affiliate company, managed interstate highways in Virginia.

The company, which is privately owned in large part by relatives of founder Louis Berger, recently forced out chairman Derish Wolff in response to prosecutors' demands, Wolff's attorney said in court last month.

Court documents filed by attorney Herbert Stern also reveal that the government was contemplating a deal would allow the company to continue bidding on federal contracts. Stern didn't return repeated calls.

"The nexus of the discussions turned on whether there would be a non-prosecution agreement, in which there would be no crime charged or a deferred prosecution, in which there would be a crime charged but deferred," Stern said during an Aug. 10 hearing.

Attorneys for the company met with prosecutors last July "to beg and plead that the government accept a very large amount of money without the necessity of filing a criminal charge against the company," Stern said in court.

At this meeting, "The government was told that the mere bringing of a charge would force the Berger Group to close its doors," Stern said.

Behind the scenes, U.S. officials repeatedly have voiced frustration about the company's work.

In May 2004 — three months after then-President George W. Bush publicly praised the company for its quick construction of a section of the Kabul-to-Kandahar Highway — then-U.S. Ambassador Zalmay Khalilzad raised concerns about Louis Berger.

"These problems are now beginning to interfere with the credibility of the U.S. Mission in Afghanistan, and require immediate corrective action," he wrote.

Later that year, Patrick Fine, USAID's top official in Afghanistan, questioned the quality of schools and clinics whose construction was overseen by Louis Berger. "It is time to cut our losses and put in place an alternative strategy," he wrote.

Last year, McClatchy reported that delays and cost overruns had plagued projects built by Louis Berger and Black & Veatch, including a $300 million power plant in Kabul.

In its internal March 2009 report, USAID officials conceded that the agency's own approach was partly to blame.

Under its current contract with Louis Berger and Black & Veatch, the government can't fine the companies for missing deadlines, but must ask them to reduce their fees voluntarily.

USAID also blames the problems on its method of awarding contracts.

Like Halliburton, which by some estimates received more than $10 billion in Iraq reconstruction contracts, Louis Berger and Black & Veatch received a "cost-plus contract," which reimburses costs and pays a percentage of those expenses as a fee.

USAID acknowledged "by putting so many eggs in one basket, many of USAID's high priority infrastructure projects suffer."

Tish Wells contributed to this article.